2012 (4) TMI 246 - AT - Income Tax

Denying exemption u/s 10B to the appellant and restricting benefit of deduction u/s 80HHE it to the extent of 10% of receipts from CIC Inc. USA, (excluding reimbursements for traveling) assessee is a company and registered with the ministry of Industry as 100% Export Oriented Unit - AO stated that assessee has not developed any software programme but main activity of the assessee is to train engineers and other professionals in administration of computer software, especially SAP and export them out of India as per the requirements of CIC assessee contested that the training of the personals is part and parcel of the whole process of job of customization of software through a pre-defined training curriculum assessee further contended that once the claim of deduction u/s 80HHE has been allowed by the CIT(A), then the claim of exemption u/s 10B should also have been allowed - Held that - the software developed was uploaded into the server of CIC through e-mail- no compact disctape, perforated media or other information storage device was ever exported physically out of India, had any meaningful software ever been produced, it could definitely have been exported via the medium of a compact disc or a computer cartridge. It is pertinent to note that the provisions of sec. 10B required the transmission of customized data of computer programme through electronic media and email is no doubt an electronic media and therefore, the objection raised by the Assessing Officer is unfounded - raising of bill on the basis of man-hour further supports the case of the assessee that the assessee is carryout the customization work of software and development of programme as per the specific requirement of CIC clients - direct the Assessing Officer to allow deduction u/s 10B of the Act. The relief under section 80HHE, in the facts and circumstances of the ease, as an alternative prayer, becomes academic - in favour of assesee.

Issues Involved:
1. Denial of exemption under Section 10B of the Income Tax Act.
2. Restriction of deduction under Section 80HHE.
3. Retrospective effect of CBDT notification dated 26.9.2000.
4. Netting off of interest and exclusion under Section 80HHE(3).
5. Levy of interest under Sections 234B and 234C.
6. Denial of exemption under Section 10B on interest income.

Detailed Analysis:

1. Denial of Exemption under Section 10B:
The assessee, a 100% Export Oriented Unit (EOU), claimed exemption under Section 10B for the assessment years 1997-98 to 1999-00, arguing that its activities involved the customization and development of software, specifically SAP, for export. The Assessing Officer (AO) denied the exemption, viewing the assessee as a recruitment agency rather than a manufacturer of software. The CIT(A) upheld this denial, stating that the assessee did not engage in the manufacture or production of computer software. However, the Tribunal found that the assessee's activities, including the customization of SAP software and the training of personnel, constituted the production of computer software as defined under Section 10B and Section 10BB. The Tribunal noted that the customization involved intellectual processes and the creation of new programs, thus qualifying for the exemption.

2. Restriction of Deduction under Section 80HHE:
The CIT(A) restricted the deduction under Section 80HHE to 10% of receipts from CIC Inc., USA, excluding reimbursements for traveling. The assessee argued that the entire revenue from customization and development of software should be eligible for deduction. The Tribunal, however, did not need to address this issue in detail as it allowed the claim under Section 10B, making the Section 80HHE claim redundant.

3. Retrospective Effect of CBDT Notification:
The assessee contended that the CBDT notification dated 26.9.2000, which allowed benefits under Sections 10B and 80HHE to human resource services, should be given retrospective effect. The Tribunal did not specifically address this issue separately, as it found the assessee's activities to qualify under the existing definitions of computer software and production under Section 10B.

4. Netting Off of Interest and Exclusion under Section 80HHE(3):
The CIT(A) denied the netting off of interest and excluded 90% of the interest income from the deduction under Section 80HHE(3), following the Bombay High Court's ruling that not all interest income could be excluded. The Tribunal upheld this view, agreeing that the interest income did not have a direct nexus to the income derived from the undertaking.

5. Levy of Interest under Sections 234B and 234C:
The assessee challenged the levy of interest under Sections 234B and 234C, arguing that the AO did not provide a speaking order or an opportunity to contest the levy. The Tribunal found the levy of interest to be consequential and did not require a specific finding.

6. Denial of Exemption under Section 10B on Interest Income:
The CIT(A) and AO denied the exemption under Section 10B on interest income, treating it as business income. The Tribunal, referencing the Supreme Court decision in Liberty India Ltd., upheld this denial, stating that the interest income did not have a direct nexus with the income derived from the undertaking.

Conclusion:
The Tribunal allowed the assessee's appeals regarding the exemption under Section 10B for the customization and development of software, thus rendering the Section 80HHE claims redundant. The Tribunal upheld the denial of exemption under Section 10B on interest income and found the levy of interest under Sections 234B and 234C to be consequential. The revenue's appeals were partly allowed, aligning with the Tribunal's findings on the interest income and the Section 80HHE claims.

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